Crisis parting solar sector's weak from strong

NEW YORK/LOS ANGELES (Reuters) - A global credit crisis and a steep slide in prices of solar panels has sent makers of the clean energy source reeling, but the damage done to share prices presents an opening for investors to buy into the stronger players.

Investors have fled the burgeoning solar sector in the past three weeks, sped along by a global financial crisis and warnings from sector heavyweight SunPower Corp and China’s JA Solar that the declining euro would weigh on revenue and profits.

Chinese solar cell and module makers are the most exposed to a downturn, analysts and investors said, since they sell much of their product to Europe, have some of the highest costs, and some of the least differentiated products.

“You have two almost entirely different industries ... the valuations that some of the Asian cell manufacturers are trading at now are basically implying that people don’t think they are going to survive,” said Edward Guinness, co-manager of the Guinness Atkinson Alternative Energy Fund in London.

Shares of Chinese solar companies JA Solar, LDK Solar, Canadian Solar Inc, Trina Solar Ltd and Suntech Power Holdings Co Ltd all trade at less than 4 times 2009 earnings estimates, compared with multiples of 9.5 and 17 for U.S. firms SunPower and First Solar Inc, respectively.

“The companies in Europe or the U.S. have better name recognition,” said Friedman Billings Ramsey analyst Mehdi Hosseini. “When financiers have more risk because of a financial crisis, the quality of the product becomes a key issue. This is going to put more pressure on the Chinese.”

Even with SunPower’s warning that it was exposed to the euro decline, its strong balance sheet and industry-leading solar module efficiency should keep its future bright, investors and analysts said. First Solar, which also has deep pockets and the industry’s cheapest production costs, is also in a strong position.

“You have the luxury of getting a good price on just about any company you care to buy. So there is a bit of a bias toward the higher quality companies, or toward the companies that are a little more solid,” said Kevin Landis, manager of the $3 million Firsthand Alternative Energy Fund, whose holdings include SunPower, First Solar and Taiwan’s Motech.

‘OVER-PANIC’

Europe is the largest market for photovoltaic solar modules that turn sunlight into electricity because generous subsidies in Germany and Spain attracted players from around the globe.

But a pullback in subsidies in both of those markets and a 20 percent drop in the euro versus the U.S. dollar and Chinese renminbi has meant some non-European manufacturers have seen their average selling prices plummet by as much as 30 percent.

That sharper-than-expected decline has caused an “over-panic” among investors, JA Solar Chief Executive Samuel Yang said on Wednesday, because the industry is still expecting strong demand for renewable energy sources to keep sales high.

Indeed, solar stocks have erased a 50 percent rally in late October on investor fears that declining selling prices would shrink margins and that financing for new projects would evaporate because of a global credit crisis.

Many, however, say new solar tax breaks in the United States and funding from companies and utilities with strong balance sheets will broaden the demand base.

“There is more than enough capital out there to support the growth of the solar industry,” said Signal Hill analyst Michael Carboy, who attributed the recent selloff to investors’ “profound inability to look beyond the end of one’s nose.”

“The notion that we are going to be giving panels away for 20 or 30 cents on the dollar is absurd,” Carboy added.

Prices for solar equipment are expected to drop steadily over the coming years as technological and manufacturing advances push prices on solar power near those of traditional power generating sources such as natural gas.

But recent solar output increases and declining subsidies in Europe could lead to an oversupply of solar panels at a time when Chinese companies face the industry’s highest costs for polysilicon, the key component of most solar cells, squeezing margins for some manufacturers.

“Silicon costs remain much higher in China because the Chinese companies were late to the party, late to ramp production up, and the Chinese companies relied on the spot market” for silicon supplies, said analyst Paul Leming of Princeton Tech Research.

Polysilicon costs in China on the spot, or near-term, market have dropped to between about $200 to $220 per kilogram from more than $350 earlier this year, but that is still above some European makers’ costs of between $70 to $80 from long-term supply contracts.

JA Solar’s Yang said the company would press its polysilicon suppliers to cut their prices, but analysts said that could take a few weeks or months to take effect.

“They have a huge opportunity to take the costs of their product down a lot,” said Guinness, whose fund owns shares in Suntech, SunPower, Q-Cells, LDK and JA Solar.